Provisional Legislative Council
Panel on Financial Affairs
and
Panel on Transport
Equity Injection for Implementation of West Rail Phase I Project
Purpose
This paper briefs Members on the intended submission to Finance Committee for approval, subject to the enactment of the Kowloon-Canton Railway Corporation (Amendment) Bill 1998, of a commitment to inject equity of $29,000 million from the Capital Investment Fund into the Kowloon-Canton Railway Corporation, to allow major works on West Rail Phase I to proceed. A copy of the draft Finance Committee agenda item for the meeting on 27 February is enclosed for Members’ information.
2. The Administration will be pleased to discuss its proposals and to answer any questions that Members may have on these at the joint meeting of the Panels on 12 February 1998.
Finance Bureau
February 1998
DRAFT
For discussion
on 27 February 1998
FCR(97-98)
ITEM FOR FINANCE COMMITTEE
CAPITAL INVESTMENT FUND
NEW HEAD - KOWLOON-CANTON RAILWAY CORPORATION
New Subhead "West Rail Phase I"
Members are invited to approve, subject to the enactment of the Kowloon-Canton Railway Corporation (Amendment) Bill 1998, a commitment to inject equity of $29,000 million from the Capital Investment Fund into the Kowloon-Canton Railway Corporation, to allow major works on West Rail Phase I to proceed.
PROBLEM
We need to inject equity into the Kowloon-Canton Railway Corporation (KCRC) to enable it to construct West Rail Phase I (WR).
PROPOSAL
2. We propose that Members approve a commitment of $29,000 million from the Capital Investment Fund (CIF) as equity to be injected into KCRC. This approval will be subject to the enactment of the KCRC (Amendment) Bill 1998 which was introduced into the Provisional Legislative Council on 11 February 1998 and which provides, inter alia, for the Corporation to have a proper share capital structure and the powers to undertake authorised new railway projects.
JUSTIFICATION
KCRC's Business Plan
3. To help Members assess the nature of the proposed investment in the WR project, KCRC has prepared a Business Plan for WR covering the following matters –
A copy of the Business Plan is at Enclosure 1. Major issues in the Business Plan are highlighted as follows.
Cost estimate for WR
4. KCRC's latest total project cost estimate is $64 billion, broken down as follows–
| $billion (money of the day) | |
|---|---|
| Capital costs | 51.0 |
| Land acquisition costs | 7.9 |
| Financing costs | 5.1 |
| _________ | |
| Total | 64.0 |
| _________ |
Government's assessment
5. Government's consultants have independently assessed KCRC's capital cost estimates and confirmed that the overall cost estimates are within an acceptable range. The Lands Department has also advised that KCRC's base estimate for the land acquisition costs, from which the above money of the day (MOD) figure is derived, is not unreasonable. These figures do not however take into account additional costs that may arise due to development of the airspace above any locations along the WR alignment (please refer to paragraph 9 below).
Financing arrangements
6. The total project costs are intended to be financed as follows–
| $billion | |
|---|---|
| Borrowings | 24.9 |
| Internal resources | 10.1 |
| Government equity | 29.0 |
| _______ | |
| Total | 64.0 |
| _______ |
Government's assessment
7. Government's financial consultants have confirmed that KCRC has the ability to raise commercial loans of $24.9 billion at a corporate level and the estimated financing costs are reasonable. As for KCRC's internal resources, they will come from its East Rail and Light Rail property development profits and interest earnings. The remaining requirement to be funded by Government in the form of equity is roughly equal to half of the total project cost estimate. Our financial consultants have advised that this amount should provide KCRC with a reasonably strong equity base in comparison with the loans to be raised and also let KCRC have sufficient flexibility in arranging its finances. The amount also gives a clear signal to the financial market about the extent of Government commitment to the project which should further strengthen the confidence of lenders in providing loans to KCRC. It will not be appropriate to provide more equity than optimally required under the financing proposal, as equity is generally a more expensive means of financing than commercial borrowing. More equity also means fewer opportunities for private sector participation in the financing of the railway projects.
Project Evaluation
8. KCRC's latest estimate for the project internal rate of return (IRR) of West Rail is 8.9%. KCRC and our financial consultants have also run some sensitivity tests to examine various upside and downside scenarios. These result in project IRR estimates ranging from 8.2% to 11%, which are comparable with the projected 10% for the Airport Railway and MTRC's estimate of 8.5% for the Tseung Kwan O Extension. On the basis of these figures, we are reasonably confident that West Rail will be a commercially viable project. The proposed equity injection of $29 billion into KCRC should therefore be a prudent investment.
Property Development
9. For WR financing purposes, KCRC will continue to be allowed to make use of the development potential along its East Rail and Light Rail alignments so that the profits derived can be applied towards meeting the project costs. In respect of property developments along WR, KCRC will be allowed to undertake these developments so as to ensure the timely delivery of housing supply, better integration with the neighbourhood and smooth interface with railway operations. However, as these developments will go beyond the time frame for the WR project and KCRC can achieve a satisfactory project internal rate of return without the stream of profits from WR developments, KCRC will require the profits neither for financing the project nor for improving the project return. Therefore, we intend and KCRC has accepted that it should pass on the net (i.e. exclusive of KCRC's contingent expenses and, if necessary, any additional development-related costs) WR property development profits to Government directly as soon as they are realised, rather than treating them as windfall profits.
Draft Project Agreement
10. On the basis of the Business Plan and our assessment above, a draft Project Agreement was drawn up between KCRC and Government. The draft Project Agreement sets out how the WR project will be undertaken and the respective obligations of both parties in terms of the financing, design, construction and operation of WR. A clause by clause explanation of the draft Project Agreement is at Enclosure 2.
Upfront equity injection
11. In order to complete WR in a timely and cost effective manner, KCRC needs substantial resources to continue to take forward the project. As KCRC has steadily invested its existing resources to advance the technical studies for the project and the project outlays in 1998 and 1999 are estimated to be some $2 billion and $13.9 billion respectively, we have agreed to inject equity into the KCRC upfront so as to alleviate its resource constraints and help take forward the project according to the tight implementation time-table. The upfront injection of equity, together with KCRC's internal resources to be generated in the next few years, will also enable KCRC to defer its commercial borrowings to a later stage of the project, around the year 2000, thereby minimising its financing costs. The proposed upfront equity injection will commence following the enactment of the KCRC (Amendment) Bill 1998.
Impact of WR on fare levels for existing lines
12. KCRC has indicated that the fare policy for WR will be developed independently of its existing businesses on the basis of prudent commercial principles, having regard to such factors as affordability and competition with other transport modes. Thus, KCRC would not adjust fares for passengers using its existing lines to subsidise the operations of WR.
FINANCIAL IMPLICATIONS
13. Subject to Members’ approval, we will inject the equity in question into KCRC by two equal instalments of $14,500 million each, with the first in May 1998 and the second approximately a year later.
14. We will also need to carry out some essential public infrastructure works throughout the construction period of WR in the order of $3,135 million in 1997 prices to enable West Rail to be open to the public. Such works include the provision of feeder roads, construction of public transport interchanges, reclamation etc. They will be entrusted to KCRC and their costs will be reimbursed by Government, through funding from the Capital Works Reserve Fund. Funding approval for these works will be sought separately from the legislature in due course.
ENVIRONMENTAL IMPLICATIONS
15. KCRC completed an Initial Environmental Impact Assessment (IEIA) on WR in August 1997. The study indicated that operational train noise and ecological impact at Kam Tin Valley were the major environmental concerns and concluded that with the implementation of mitigation measures the impacts would not be insurmountable. The IEIA was endorsed by the Advisory Council on the Environment (ACE) in September 1997. KCRC is now finalising the EIA study and will consult ACE again on the findings in due course. KCRC has agreed that work will not commence until ACE is fully consulted. KCRC is committed to implementing all the mitigation measures and environmental monitoring and audit programme recommended in the EIA study.
BACKGROUND INFORMATION
16. West Rail (previously known as the Western Corridor Railway) is one of the three priority railway projects recommended in the 1994 Railway Development Strategy. On 13 December 1996, the former Legislative Council was briefed that–
17. In accordance with the project programme and under the Railways Ordinance, Government gazetted Phase I of West Rail in two stages, on 25 July 1997 and 3 October 1997 respectively. Slightly over 200 objections have been received. The majority of these objections relate to land matters and compensation issues. Under the Railways Ordinance, these objections will be handled within a period of nine months upon the expiry of the 60 days objection period. The relevant railway schemes and any unwithdrawn objections will then be submitted to the Executive Council for consideration by September 1998. Pending the authorisation of the schemes by the Executive Council, the WR Project Agreement which sets out the main terms and conditions for KCRC to undertake the project will be executed. KCRC will design and complete the construction of WR in order to bring the railway into operation by the Scheduled Operating Date, targeted at December 2003, and thereafter to operate and maintain the railway for 50 years.
Finance Bureau
February 1998
(FIN CR 1/986/95)
Draft Project Agreement
for the
Financing, Design, Construction and Operation of West Rail
between
The Government of the Hong Kong Special Administrative Region
and
The Kowloon-Canton Railway Corporation
Clause by Clause Explanation
Introduction
1. The Project Agreement is divided into eleven parts with four appendices. The eleven parts cover interpretation, financing, property developments, scope of works, planning, design and construction, programme and progress, operation and maintenance, land matters, environmental protection, transport, project monitoring and accounts and miscellaneous provisions. The Project Agreement is intended to form a binding contract between Government and the Corporation. It sets out clearly, and also delimits, the precise obligations of Government to the Corporation and vice versa.
Recitals
2. The recitals set out the general scope and purpose of the Project Agreement. They refer to matters addressed prior to the date of the Project Agreement. Such matters include:
Part I - Interpretation
3. The interpretation section sets out definitions of specialised terms used in the Project Agreement. These ensure precision and consistency in the terms used with a view to ensuring that there is no misunderstanding as to the duties and obligations of the parties.
"Baseline Programme" means the programme defining the Scope of Works to be executed, the timing, sequence and capital budgets and contingencies required to effect the completion of West Rail, as may be amended from time to time in accordance with the provisions of Clause 19.
"Capital Cost" means the aggregate of the costs which are payable by the Corporation for feasibility studies, technical studies, land acquisition and related costs (including (i) any amount payable to Government as licence fees for the Works Areas, (ii) land premium payable by the Corporation in respect of West Rail Depot and (iii) all costs and amounts referred to in Clause 21 (which deals with land acquisition and related costs), design, engineering, procurement, construction, testing, commissioning and completion of the Railway Construction Works and the Reprovisioning, Remedial and Improvement Works.
"Commercial Operations" means the operation of West Rail on a revenue earning basis providing scheduled transport for the public.
"Essential Public Infrastructure Works" means any item of work associated with West Rail described as such in Appendix 1, as may be amended or varied from time to time in accordance with Clause 11.4, which is deemed or to be deemed by Government or a public body to be necessary to enable West Rail to be opened for Commercial Operations, the terms of design, construction and finishes of which are to be executed by the Corporation to the satisfaction of Government or, as the case may be, such public body and following completion of which shall be handed over to Government or, as the case may be, such public body, and which Government or, as the case may be, such public body shall own, manage, maintain and control.
"Operating Date" means the actual date on which West Rail commences Commercial Operations.
"Railway Construction Works" means the architectural, civil, electrical and mechanical engineering works, trackwork, signalling and control systems, rolling stock and maintenance equipment which are necessary for the construction and/or operation of West Rail.
"Reprovisioning, Remedial and Improvement Works" means the replacement, modification or improvement of existing privately owned facilities and facilities owned by Government or public bodies affected by, or required as a consequence of, the construction of West Rail, a non-exhaustive list of which is described as such in Appendix 1, as may be amended or varied from time to time in accordance with Clause 11.4, and following completion of which shall be owned, managed, maintained and controlled by such private owner, Government or, as the case may be, such public body.
"Scheduled Operating Date" means the date on which West Rail is scheduled to commence Commercial Operations as set out in the Baseline Programme.
"Scope of Works" means the West Rail Works, the Essential Public Infrastructure Works and the Reprovisioning, Remedial and Improvement Works.
"West Rail Works" means the Railway Construction Works together with such additional provisions and works as are required to facilitate the integration of West Rail with the Light Rail, the proposed developments integrated with West Rail Stations and the future extension of West Rail, as detailed in Appendix 1, as may be amended from time to time in accordance with Clause 11.4.
Part II - Financing of West Rail
4. This section sets out the financial support to be provided by Government to the Corporation. The main provisions are as follows:
Clause 2.1 - The Corporation will finance the full amount of the Capital Cost.
Clause 2.2 - The Capital Cost Estimate and the Financial Projections set out in Appendices 3 and 4 respectively to the Project Agreement are for illustrative purposes only and are not binding.
Clause 2.3 - Government will provide full cooperation to the Corporation in respect of all reasonable requirements for information or assistance of a non-financial nature to enable the Corporation to finance the completion of West Rail.
Clause 3 provides that the Corporation will apply its internal funds towards meeting the Capital Cost. Such internal funds include the property development profits accrued in respect of the East Rail and the Light Rail for the developments but exclude accumulated operational profits. Government will procure that the required approval is given under the Ordinance for such application
Clause 4 states that the Corporation will, when it thinks fit, raise and maintain commercial financing to finance the balance of the total costs of works required to complete West Rail which are not met by internal funds and the total equity contributions made or to be made by Government. Government will not, for as long as there remain outstanding any amounts in respect of such commercial financing, give any direction to the Corporation under the Ordinance to carry its profits to any reserve funds.
Clause 5 sets out that Government will inject equity of $29 billion for West Rail in two stages before 31 March 2000 and receive shares in return. All equity will be fully paid up. The KCRC Ordinance provides for shares of $100,000 each. The $29 billion new capital to be paid for new shares is required to be paid on the date of allotment of the relevant shares.
Part III - Property Developments
5. This section sets out the arrangements for dealing with property development rights along the East Rail, the Light Rail and West Rail.
Clause 6 provides that Government shall use reasonable endeavours to enable the Corporation to undertake, at its own cost, proposed commercial or residential property developments at locations along the East Rail and the Light Rail subject to basic terms and conditions set out in the Project Agreement and the approval of the Chief Executive in Council or the Director of Lands under delegated authority, as appropriate. This Clause also sets out Government's understanding that the Corporation intends to apply accrued property development profits in respect of the East Rail and the Light Rail property developments to the extent reflected in the Financial Projections annexed to the Project Agreement as an appendix in and towards the financing of West Rail.
Clause 7 provides that property developments to be undertaken above or adjacent to West Rail stations, West Rail depot, facilities or railway premises shall be in such manner and upon such terms as may be agreed between Government and the Corporation.
Clause 8 specifies that property developments to be undertaken by the Corporation at locations along the East Rail, the Light Rail and West Rail shall be granted by private treaty and subject to the conditions set out therein.
Clause 9 provides that the private treaty grants to be issued in respect of the property development sites to the Corporation will provide that the Corporation manages and maintains the completed developments subject to a deed of mutual covenant incorporating a management agreement to be approved by the Director of Lands and subject to the Building Management Ordinance (Cap.344 of the Laws of Hong Kong).
Part IV - Scope of Works, Planning, Design and Construction
6. This section deals with the obligations of the Corporation and Government in respect of the design, construction, completion, testing, commissioning, operation and maintenance of West Rail. These obligations need to be clearly set out to enable financiers to make a proper evaluation of the Corporation's creditworthiness.
Clause 10 provides that the design and construction of West Rail shall reflect the Corporation's responsibilities and duties under the KCRC Ordinance, the Project Agreement and the Buildings Ordinance (Cap.123 of the Laws of Hong Kong).
Clause 11 sets out the respective responsibilities of Government and the Corporation for the design, construction, completion, testing and commissioning of the different aspects of the Scope of Works and the manner in which such works may be amended or varied or added to from time to time. The Corporation is required to design, construct and complete the Essential Public Infrastructure Works at Government's cost (subject to the necessary approvals having been obtained) or, as the case may be, the relevant public body's cost and to design, construct and complete the Reprovisioning, Remedial and Improvement Works at the Corporation's cost. Clause 11 further sets out the Corporation's obligations to remedy any defects of construction contractors during the defects liability period in the relevant construction contracts in respect of the Essential Public Infrastructure Works and the Reprovisioning, Remedial and Improvement Works and to procure direct collateral warranties to Government on such works and on designs of such works from the date of expiry of the relevant defects liability period. This ensures that Government receives warranties and undertakings in respect of the Essential Public Infrastructure Works and the Reprovisioning, Remedial and Improvement Works direct from the relevant construction contractors and design consultants.
Clause 12 requires the design of West Rail to be based upon the Corporation's forecast of patronage of, and demand for, West Rail as agreed with Government.
Clause 13 sets out the Corporation's warranty to Government in respect of the Essential Public Infrastructure Works and the Reprovisioning, Remedial and Improvement Works.
Clause 14 sets out Government's obligation to carry out activities and tasks it has undertaken under the Project Agreement in a timely manner to the extent as necessary to enable the Corporation to carry out the planning, design and construction of West Rail.
Clause 15 sets out that the Corporation will obtain appropriate insurance to protect its own and Government's interest.
Clause 16 deals with entrustment arrangements under which Government and the Corporation may request the other to carry out works on its behalf.
Clause 17 sets out the requirements for safety plan and safety audit procedures to be incorporated by the Corporation in all of its construction contracts and to provide details of such measures and their ongoing implementation in any report to be provided to the monitoring committee that may be appointed by the Secretary for Transport.
Clause 18 requires the Corporation to make allowance in its design and construction of West Rail for possible future extensions of the railway.
Part V - Programme and Progress
7. This part deals with the obligation of the Corporation to complete West Rail in accordance with the Baseline Programme and to commence Commercial Operations by the Scheduled Operating Date. It demonstrates Government's involvement in the programme timing and ability to monitor the progress of the Scope of Works against the Baseline Programme.
Clause 19 requires the Corporation to prepare the Baseline Programme to demonstrate the Corporation's proposal to carry out and budget for the Scope of Works up to the Operating Date. The Clause also sets out how the Baseline Programme could be amended and the obligations of Government and the Corporation with regard to making land available for the project and the completion of the project respectively.
Part VI - Operation and Maintenance
8. This part deals with the obligations of the Corporation for the operation and maintenance of West Rail.
Clause 20 provides that the Corporation will have the right to own and operate West Rail for the period of 50 years from the date of vesting of land in the Corporation. Government and the Corporation will enter into an operating agreement which will set out the Corporation's rights and obligations upon opening of West Rail upon similar terms applicable to the East Rail and the Light Rail.
Part VII - Land
9. The arrangements regarding land to be entered into between Government and the Corporation, the land rights to be granted by Government to the Corporation and the commercial activities at West Rail stations are set out in this part. It demonstrates Government's commitment to make the West Rail project viable.
Clause 21 sets out the obligations of the Corporation to bear all land acquisition and related costs.
Clause 22 deals with land to be made available to the Corporation for construction purposes.
Clause 23 deals with land to be vested or, as the case may be, granted by private treaty to the Corporation for operational purposes. The conditions upon which a site for West Rail depot will be granted, subject to the approval of the Chief Executive in Council, by private treaty to the Corporation are also set out.
Clause 24 provides that the Corporation is permitted to carry out commercial activities inside West Rail stations consistent with the practice currently adopted by the Corporation in respect of its East Rail stations.
Part VIII - Environmental Protection
10. This part sets out the environmental protection matters applicable to the West Rail project.
Clause 25 requires the Corporation to carry out environmental impact assessment studies in connection with West Rail and its associated developments and to implement all the mitigation measures, environmental monitoring and audit programmes and all environmental impact assessment recommendations in respect of such studies at its all costs. The Corporation will not be responsible for providing environmental protection measures on premises outside the Rail Area if these arise from subsequent changes in Government policies and statutory requirements which are additional to those envisaged in such environmental impact assessment studies.
Part IX - Transport
11. This part deals with the commitment of Government and the Corporation to encourage use of West Rail.
Clause 26 requires Government to encourage use of West Rail by the public and to use reasonable endeavours to facilitate reasonable access by the public to West Rail stations.
Clause 27 requires the Corporation to consult with all relevant transport operators and Government for the design and construction of public transport interchanges at West Rail stations.
Part X - Project Monitoring and Accounts
12. This part sets out the right of Government to appoint a monitoring committee in relation to the West Rail project and deals with the obligations of the Corporation to cooperate with such committee and to maintain and submit to Government upon request books, accounts and records in connection with the West Rail project.
Clause 28 permits the Secretary for Transport at any time to appoint a committee to monitor the design, construction, completion and financing of West Rail, the progress of such works according to the Baseline Programme and the project costs according to the Capital Cost Estimate. Membership and terms of reference of such committee shall be decided upon by the Secretary for Transport and the Corporation is required to cooperate with Government in all aspects of the monitoring procedure.
Clause 29 requires the Corporation to keep proper books and accounts, records and information in connection with West Rail and to provide such accounts, records and information to Government upon request. The Clause also sets out the Corporation's obligations to prepare its annual report and maintain its accounts such that separate costs in connection with West Rail are readily identifiable. Government may require financial statements to be prepared by the Corporation to be audited by a certified public accountant or a public accountant registered under the Professional Accountants Ordinance (Cap.50 of the Laws of Hong Kong).
Part XI - Miscellaneous
13. This section covers other matters of essential legal detail obtained in contracts.
Clause 30 clarifies that the development of West Rail under the Project Agreement is to be consistent with the KCRC Ordinance.
Clause 31 clarifies that any provision or part of the Project Agreement which may become invalid in law would not cause any other provision or part of the Project Agreement to become invalid.
Clause 32 makes it clear that the Project Agreement is not to be interpreted as changing the essential relationship between the Corporation and Government.
Clause 33 requires the parties to furnish any subsidiary documentation necessary to implement the Project Agreement.
Clause 34 states that the obligations of the parties do not extend beyond the specific provisions set out in the Project Agreement.
Clause 35 sets out in a manner in which the Project Agreement may be amended, waived, discharged or terminated by the parties.
Clause 36 provides that any failure to exercise or delay in the exercising of any right or remedy by any party will not operate as a waiver of such right or remedy or any other right or remedy.
Clause 37 clarifies that the KCRC Ordinance has precedence over the Project Agreement.
Clause 38 sets out the obligations concerning the payments made by one party to the other, including timing of payments and interest payable on overdue payments.
Clause 39 requires each party to obtain the other party's prior consent before the disclosure of any confidential information.
Clause 40 sets out how any notices required to be passed between the parties should be transmitted.
Clause 41 states that the law governing the Project Agreement is the law of Hong Kong.
Clause 42 states that the resolution of disputes or differences is to be referred to a sub-committee of the Railway Development Steering Committee of Government ("RDSCOM") and, failing resolution thereunder, to RDSCOM itself for determination.
Appendix 1 - Scope of Works
14. This sets out the elements of the Scope of Works for the West Rail project which are the Essential Public Infrastructure Works, the Reprovisioning, Remedial and Improvement Works and the West Rail Works.
Appendix 2 - Summary of the Baseline Programme
15. This sets out a summary of the Baseline Programme which will form the basis for the preparation by the Corporation of the Baseline Programme itself.
Appendix 3 - Capital Cost Estimate
16. This sets out the estimate of the Capital Cost by the Corporation for the West Rail project for illustrative purposes only.
Appendix 4 - Financial Projections
17. This sets out the financial projections of the Corporation for the West Rail project for illustrative purposes only.